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Not Manna from Heaven after All: The Endogeneity of Oil

This is a chapter in a book entitled “From Institutions Curse to Resource Blessing,” under
contract at Cambridge University Press. Forthcoming

Abstract:

Is there really a resource curse? Or is it an institutions curse? Drawing on recent findings that challenge the view that there is a causal relationship running from oil to political and economic underdevelopment, this chapter seeks to identify what determines a hydrocarbons sector in the first place. I argue and find that revenue starved states with low capacity are more likely to launch oil exploration efforts, goose the production of extant wells, export oil to a higher degree, tax it more heavily, and attract higher levels of capital in hydrocarbons. While National Oil Companies have increasingly shouldered more of the heavy lifting to make this happen, private investors also continue to play a prominent role. They exploit huge advantages in power, money, and information to protect their property rights in host countries across the developing world; International Oil Companies increasingly engage in regulatory arbitrage to sidestep stringent environmental regulations in their home countries, as well as higher taxes. A case study of Azerbaijan that allows me to exploit an exogenous shock in state capacity corroborates these claims. Also, a series of statistical analyses performed on a panel dataset with global scope yield results that support them as well. These hold after controlling for geological endowments, oil prices, and production costs, no matter how I operationalize oil, or state capacity, and across a host of specifications that address endogeneity bias. These include static, fixed effects models, Autoregressive Distributed Lag models estimated via Structure Generalized Method of Moments, and instrumenting state capacity with relevant lags, or Two-Stage Least Squares that use factor endowments and country age as instruments.